Comment du Jour: Stock Market Crash and San Francisco Real Estate

Every so often, we pull a comment from the discussions that we think might spark further commentary, because we know not everyone is reading the comments, and we couldn’t possibly come up with all these great thoughts ourselves.

If the Dow falls to 12000, then even the “middling” [we think you mean middle of the road like $600,000-$900,000?] SF properties will start flying off the shelves. Remember what happened to RE prices after the last stock market crash.

A very interesting observation. Can you elaborate on what exactly did happen after the last stock market crash, and what you mean by “middling”?

7 Comments

Out of curiosity I plotted San Francisco median home price from 1994-2007, and compared that against the S&P500 during the same time. It appears during the crash of 2000-2003, SF real estate actually went up after an initial small dip. And after the market recovered, it actually propelled the SF real estate market even further.

The idea behind that is that smart money aways needs to find new growth opportunities. When dotcom was no longer the place to be, the money found Real Estate as the next big thing so it all rushed there. During the last few months, as the banks and financials all got hit in the market by the subprime woes, the smart money found a haven in technology (as evident by the nasdaq’s return since the last ‘correction’ in July). However, after Cisco’s earnings call last week (in which the CEO said the company saw a dramatic decrease in sales to banks) the smart money exited the tech sector and I think it’s right now in green technologies like First Solar. God knows how long it will linger there before it has to move on to a new sector.

At any rate, the theory goes that when the stock market is no longer the place to make the desired returns, and the bond market returns very little, then money will rush back to real estate because people have to put their money to work to make money somewhere while they are asleep.

Personally, I think the bull market in SF real estate after the last crash was more due to low interest rates than smart money looking for a new home away from the under performing stock market. And I am not sure this time $$ will return back to real estate.

You are the CEO of your real estate, and you know your cash in flow and outflow and can model in a reasonable rate of return.

When all hell is breaking loose in the stock market and bond market, you don’t want to give money to uncontrollable factors.

Real Estate has ALWAYS been an armageddon hedge, and lately it’s just been an outright winner.

Prime SF properties are up 5-10% this year, which is 50-100% return on your 10% downpayment. Even overbuilt SOMA asking prices are up to $1,000/sqft. Heck, even in Portero Hill, that one project has $1,000/sqft asking prices. Ridiculous.

You are crazy if you think the last cycle (2000+) will repeat itself this time if the stock market falls. Real estate is dead money and if tech stocks crash again (especially GOOG), SF real estate will be a losing proposition.

Yeah, you’re the CEO of your real estate. What’s your cash in/cash out situation on a $1,000/sqft condo? It’s not pretty. Manhattan is $1000/sq ft. You can argue about where you’d rather live, but I assure you the number of people who want to live in SF is an insignificant fraction compared to those who want to live in Manhattan.

Why don’t you go back and plot SF R.E. during 1989-1996. Off of a much smaller run-up, R.E. crashed and burned, and you wouldn’t have had any appreciation for OVER SEVEN YEARS.

David – Manhattan real estate is only $1,000/sqft? Obviously, you’ve never lived there or own. I’ve lived there for many years, and still own a 2/2 o nthe UES. Prices in Manhattan are at $1,500-$2,000/sqft my son. 1989-1996 wasn’t painful at all either. How old are you?

Prices are up close to 10% in SF this year, I don’t think that’s bad at all.

There is a lot of wealth out there. Rich people don’t keep the money in the savings account. They want to invest and get an reasonable good return.

First, it was the tech. The money was invested in SV VC’s.

Then, after the 2000 crash, the money was taken out of VC’s. However, they need some place to go, so they went into RE and mutual fund backed securities.

Now, we already see a “flight to quality”, as the investors moving money into safe investment like treasury. However, at some point, the yield on treasury will be so low that they will want to find something else to invest in. We already see some money returning to tech, and green tech could be the next big bubble.

Some other potentials are: commercial RE, foreign (but it is kind of late to enter now already).

I think anon8mizer and others can explain the economic details better than I ever could. I am not an economist. I am not an expert. But my humble, common sense logic is as follows:

There are lots of would-be buyers of SF homes standing on the sidelines, waiting, renting, saving their money. They definitely plan to buy in SF some day. They are comforted by the fact that their downpayment stash of $100k or $200k or more has been busily earning about 10% annual returns in the stock market. So they can afford to wait and see, fully justified in their decision. Now the stock market declines, and continues to decline. Their stash starts to dwindle. Meanwhile, SF prices are holding relatively steady; not crashing as some hoped/feared. The psychology changes. Why not avoid the volatility of the stock market and put that cash before it dwindles further into some good ole real estate value and get a home to boot?

This was me in 2000-01. I bought a SF cottage in April 2002, bidding 5% over asking. Happy I did.